February 13, 2004

Federal Headlines

Small Chance for Health Care Tax Credits, Says Thomas

A health care tax credit bill would be difficult to pass in 2004 because it is expensive in a time of budget deficits, said House Ways and Means Committee Chairman William M. Thomas, R-Calif., at a February 12 speech in Washington, D.C. Capping the deduction for health insurance benefits is a cheaper and more effective way to help Americans obtain insurance, he claimed.

The deduction helps businesses spend thousands of dollars on health insurance benefits, explained Thomas. Matching them with a credit would be "an enormous drain on the Treasury," he remarked. Credits also are a low priority for many lawmakers, he added.

Thomas emphasized that he is willing to move a health care tax credit bill. But he cautioned that it would create a government-sanctioned response to the lack of health insurance coverage. Instead, Thomas favors alternative policies to compete with employer-provided health insurance. The point is to create opportunities for the market to provide health insurance products instead of a government program that distorts the marketplace, he commented.

Thomas personally favors capping health insurance premiums and giving insured workers the power to make market decisions. This would allow tax credits to gradually catch up to employer-provided benefits without "breaking the bank," he stated. In addition, health care dollars would become more scarce, requiring employees to prioritize the benefits they want."With no cap there's just no sensitivity to price," he said. Health insurance accounts are another alternative, added Thomas.

President Bush outlined a plan to provide health care tax credits in his January 20 State of the Union address (TAXDAY, 2004/01/21, W.1). He asked Congress to establish refundable tax credits of up to $1,000 for individuals and $3,000 for families to help low-income workers buy health insurance coverage.

Bush also used the address to propose tax-free insurance premiums for health savings accounts. Individuals who buy catastrophic health care coverage as part of their new accounts would be allowed to deduct 100 percent of the premium from their taxes.

By Dave Hansen, CCH News Staff

Senate Approves Highway Bill

The Senate on February 12 approved a $318 billion highway reauthorization bill (Safe, Accountable, Flexible, and Efficient Transportation Equity Act (SAFETEA), Sen 1072), after easily clearing two major hurdles. SAFETEA passed by a 76 to 21 vote

Following an 86 to 11 vote approving a cloture motion, effectively blocking further filibustering of the bill, the Senate voted 72 to 24 to waive the Budget Act in relation to a substitute amendment. The substitute, offered by Senate Environment and Public Works Chairman James M. Inhofe, R-Okla., contained the tax title for the measure approved by the Senate Finance Committee (SFC) on February 2 (TAXDAY, 2004/02/03, C.3).

The revenue title redirects funds for ethanol subsidies, reforms several excise taxes, and implements over $22 billion in revenue raisers to offset a $20 billion shortfall. One mechanism toward meeting the funding target was modifying the method in which the federal government collects excise taxes on ethanol-blended fuels.

The volumetric ethanol excise tax credit (VEETC) generates more than $2 billion per year in additional Highway Trust Fund revenues. Under the proposal, the tax collection system is altered to allow the 18.4 cents excise tax on gasoline and ethanol blended gasoline to go directly to the general fund, which is then transferred to the Highway Trust Fund. The section also establishes income and excise tax credits for biodiesel.

Revenue raisers are comprised of offsets approved in earlier SFC bills addressing corporate tax loopholes and include codification of the economic substance doctrine, and curtailing corporate inversions.

A $375 billion companion House measure (Transportation Equity Act: A Legacy for Users, HR 3550) still needs work, according to House Republican leaders. Because a veto threat is looming if the bill exceeds the $256 billion in spending called for in President Bush's budget, GOP leaders anticipate trimming the cost of the bill during conference negotiations expected to take place in June.

By Jeff Carlson, CCH News Staff

Greenspan Supports Bush Tax Cuts But Urges Restraint on Spending

Federal Reserve Board Chairman Alan Greenspan said on February 12 that he is in favor of continuing the tax cuts put in place by the Bush administration, but reiterated that constraints must be placed on spending. Greenspan made his comments before the Senate Banking Committee.

"I'm in favor, as I've indicated in the past, for continuing the tax cuts that are in dispute at this particular stage. But I would argue strenuously that it should be taken out on the expenditure side," Greenspan said in response to a question from the committee.

Greenspan added that he still supports pay-as-you-go (PAYGO) and discretionary caps as a critical issue in budgetary processing. "I think that one of the first orders of business of the Congress would be to restore discretionary caps and, especially, PAYGO. And if that is indeed the case, under current law you, would have to have a PAYGO evaluation for any change in the tax structure, "Greenspan said.

By Sarah Borchersen-Keto, CCH News Staff

Treasury Secretary Snow Appears Before SFC on FY 2005 Budget

On February 12, Treasury Secretary John Snow appeared before the Senate Finance Committee (SFC) regarding President Bush's budget for fiscal year (FY) 2005. SFC members were especially concerned about the proposed budget's impact on the deficit, the request to make the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (P.L. 107-16) and Jobs and Growth Tax Relied and Reconciliation Act of 2003 (JGTRRA) (P.L. 108-27) tax cuts permanent, and the need for a long-term alternative minimum tax (AMT) solution.

Snow described the FY 2005 budget as strengthening the economy, supporting war on terrorism, and cutting the deficit. However, a $350 billion dollar deficit is projected for 2009. SFC ranking member Max Baucus, D-Mont., told the Secretary, "I support a number of the proposals in the president's proposed budget, but I am concerned that the budget does not have a clear plan to tackle the deficit." In summing up his concerns, Baucus said, "I believe that this budget is unsound." Baucus explained that the proposed budget "will raise interest rates, slow the economy, and leave Americans poorer." He added that the FY 2005 budget does not correct the AMT problem beyond a short fix. Baucus also noted that the budget only allows for a four percent spending increase, which he called "unrealistic, given military spending."

Senator Jeff Bingaman, D-N.M., also questioned why the proposed FY 2005 budget does not address the alternative minimum tax. "To me, the AMT is a "stealth tax" and a threat. It will apply to 30 to 40 million Americans if we don't fix it," said Bingaman. He added that the AMT issue and its impact should be adequately addressed before any tax cuts are made permanent.

Reflecting on the overall economy, Baucus asked what Snow would say to "the two million American who have lost jobs." Snow responded that "jobs get created through a strong and dynamic economy." Sen. Gordon Smith, R-Ore., stated that "we need to make the tax cuts permanent so that business owners can plan, expand, and hire people." Early in the hearing, SFC Chairman Charles E. Grassley, R-Iowa, said, "We need to finish the job on tax relief" by making "tax relief seamless and permanent."

By Kimberly Martin Turner, CCH News Staff

IRS Commissioner Gets Tough on Modernization Contractors

IRS Commissioner Mark W. Everson testified before the House Ways and Means Oversight Subcommittee on February 12 that he has decided to prohibit Computer Science Corporation (CSC) from participating in several future contracts. Everson sent CSC President Mike Laphern a letter detailing the reasons for the decision, citing concerns regarding CSC's continued failure to deliver on the Integrated Financial System (ISF) project. CSC has pushed off delivery of ISF several times, but had promised in 2003 that ISF would be ready for roll-out in April 2004l, but recently revised the release date yet again.

Everson said that the contractors engaged in the business systems modernization (BSM) project must face accountability for continued failures. "Accordingly, I have decided to direct our upcoming enforcement modernization projects for collection contract support and filing and payment compliance to other contracts," he testified. However, CSC has agreed to finish its work on the ISF project under a capped price agreement at no additional cost to the IRS. Everson estimated that the bulk of ISF should be ready for roll out by the end of the IRS fiscal year later in 2004.

CSC will also stay on as the lead BSM contractor for the time-being. CSC won the BSM bid shortly after the passage of the IRS Restructuring and Reform Act of 1998 (P.L. 105-206). One of the primary goals of BSM was to update and modernize the IRS mainframe masterfiles, the most critical aspect of which is the Customer Account Data Engine (CADE). CADE is the essential building block of the entire BSM program and will essentially replace the former mainframe data processing system. While one initial CADE project was released recently, the project as a whole is years behind schedule and hundreds of millions of dollars over budget. Everson stressed that CSC will be expected to release at least one more CADE project in 2004 and expressed hope that the action taken does not fracture the IRS/CSC relationship. Everson promised more project oversight but vowed that more "draconian actions" will be taken in 2004 if the deadlines are missed.

Everson, however, did not lay all of the blame on CSC, and suggested that management failures on the part of the IRS added to the problem. Everson said that IRS executives did not have adequate oversight of these projects and that control was simply turned over to technology personnel and the contractors and, that, where the IRS was involved, it operated inefficiently through committee. "This added costs, forced some work to be redone and resulted in deadline failures. So, we are now forcing IRS business units to take ownership of the related projects," said Everson, adding that "tough decisions cannot be made by a committee because there is no way to please everyone." As part of the push for enhanced oversight, the IRS will have on-site personnel overseeing project progress.

Aside from poor contractor performance and the lack of concise IRS input, Everson also acknowledged that the BSM project deadlines may be too ambitious and indicated that the project portfolio would be trimmed from $388 million in 2004 to $285 per the fiscal year 2005 budget request. In addition, he vowed that both contractors and the IRS will be held accountable for their failures. Everson also added that the current BSM failures largely related to internal IRS operations, but that the external programs, those that focus on customer service, such as e-filing, have been very successful.

Subcommittee Chairman Amo Houghton, R-N.Y., praised Everson for his approach to the problem, noting that all government contracts should reflect an element of competition. Everson agreed, noting that contractors should be measured by their performance in relation to other contractors and indicated that future contract awards could be granted as incentives for good and timely results. As for cost overruns, subcommittee member Earl Pomeroy, D-N.D., argued that the government should try to recover costs through litigation as a way to make contractors understand that egregious failures will meet with harsh results.

Defense Contractor Tax Bills

On a final point, Houghton observed that it recently came to light that a number of defense contractors owe more than $3 billion in unpaid taxes (TAXDAY, 2004/02/13, M.1) and asked Everson what the IRS was planning to do about it. Everson responded by observing that the issue was tricky because it raises competing goals --taxpayer rights versus the expectation that government contractors pay their tax bills. Everson went on to note that this issue may need a congressional fix, suggesting that the IRS may lack the power to act in this particular instance.

By Daniel Rinke, CCH News Staff

Thomas Hints at New Strategy for FSC Bill

A bill repealing the foreign sales corporation (FSC) system of taxation could be combined with another measure for quick passage, hinted House Ways and Means Committee Chairman William M. Thomas, R-Calif., on February 12. A federal highway funding bill is a rumored candidate, a Ways and Means Republican told CCH.

Congress failed to pass an FSC replacement in 2003 after the World Trade Organization (WTO) ruled that the FSC provisions illegally subsidized exports (TAXDAY, 2004/02/02, C.1). The U.S. must meet a March 1 deadline to avoid trade sanctions of up to $4 billion by the European Union (EU), which originally brought the legal case to the WTO.

If Congress is creative it could combine an FSC bill with a must-pass measure to end the impasse, said Thomas. "There's no money. There's no way we can do it. So let's see what we can do," he suggested.

A Ways and Means Republican told CCH on February 11 that a highway funding bill may be a candidate. "We are creative right now," remarked Thomas when asked to comment.

Republicans are debating options such as what vehicle to use and when to use it, said Ways and Means member Jim McCrery, R-La., on February 11. However, Thomas and the House GOP leadership have not made a decision, he added.

The U.S. will probably miss the March 1 deadline, predicted McCrery. He hoped the EU would extend its March 1 deadline. Though nothing indicates it will, a delay would be helpful to both sides, he commented.

Pelosi Denounces Lack of Progress

The House Republican leadership apparently does not want an FSC fix before the March 1 deadline, asserted House Minority Leader Nancy Pelosi, D-Calif., at a February 12 press conference. She criticized the GOP for setting a relatively light workload in 2004 and adjourning the House until the week of February 23 for the President's Day recess.

The 2004 Economic Report of the President makes passage even more important because it embraces outsourcing of U.S. jobs, she claimed. The president's Council of Economic Advisors released the report on February 9 (TAXDAY, 2004/02/10, W.1).

By Dave Hansen, CCH News Staff

Guidance Provided on How State Elects Health Program to Be Qualified Health Insurance for Health Coverage Tax Credit (TDNR JS-1169; Rev. Proc. 2004-12)

Code Sec. 35

The Treasury Department and IRS have issued guidance intended to make it easier for state governments to elect qualified health insurance that will be eligible for the Health Coverage Tax Credit (HCTC). The HCTC assists individual participants in the Trade Adjustment Assistance program or who are receiving benefits under a pension plan that has been assumed by the Pension Benefit Guaranty Corporation. The assistance consists of an advanceable, refundable tax credit equal to 65 percent of the cost of qualified health insurance. The principal types of qualified health insurance are private health plans elected by states.

This guidance formalizes and clarifies guidance that has been provided to state governors. The Treasury Department and IRS have been working with states to implement a qualifying program for all eligible individuals. Currently, 27 states and the District of Columbia have elected plans for eligible residents.

"We want to ensure that everyone eligible for the Health Coverage Tax Credit can have the opportunity to sign up for it. We are concerned about people in the remaining 23 states who are eligible for the credit but cannot use it," said Roy Ramthun, senior advisor for health initiatives to the Secretary of the Treasury. "We are working closely with numerous government officials and health plans in these states to encourage them to make this valuable Health Coverage Tax Credit available to their eligible residents. We believe this guidance will make the election process easier." Back references: 2004FED ¶4175.01 and ¶4175.027.

Information Reporting Inapplicable for Pre-2003 FSA and HRA Payments (Notice 2004-16)

Code Sec. 6041

The IRS has announced that certain information reporting requirements set forth in Rev. Rul. 2003-43, I.R.B. 2003-21, 935, will not apply to payments made prior to 2003 in connection with flexible spending arrangements (FSAs) or health reimbursement arrangements (HRAs). Pursuant to that ruling, payments made to medical care providers through the use of debit, credit and stored-value cards are generally reportable to the IRS by the employer on Form 1099-MISC. However, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173), enacted on December 8, 2003, added new Code Sec. 6041(f), which excepts payments for medical care totaling $600 or more that are made from FSAs or HRAs from the information reporting requirements.

By applying the Form 1099 requirement without retroactive effect for payments made under FSAs and HRAs prior to 2003, the IRS is assuring employers and third-party administrators that such payments will not be subject to information reporting prior to December 31, 2002, the effective date of Code Sec. 6041(f). Back references: 2004FED ¶6702.23, ¶7324.35, ¶33,506.1871, ¶35,836.001 and ¶35,836.30.

State Headlines

Arkansas--Sales and Use, Vending Taxes: Sales and Use Tax Rate Increased; Certain Services Now Taxed

Effective March 1, 2004, the Arkansas gross receipts (sales) and compensating (use) tax rate is increased by 0.875% for a total rate of 6% (formerly, 5.125%). Effective July 1, 2004, the following services are subject to the gross receipts (sales) tax: (1) wrecker and towing; (2) collection and disposal of solid wastes; (3) cleaning parking lots and gutters; (4) dry cleaning and laundry; (5) industrial laundry; (6) mini-warehouse and self storage rental; (7) body piercing, tattooing, and electrolysis; (8) pest control; (9) security and alarm monitoring; (10) boat storage and docking fees; (11) furnishing camping spaces or trailer spaces at public or privately- owned campgrounds, except federal campgrounds, on less than a month-to-month basis; (12) locksmith; and (13) pet grooming and kennel.

Also effective July 1, 2004, the Arkansas wholesale vending tax rate is increased from 4.5% to 6%, and the decal fees paid in lieu of remitting the wholesale vending tax for items with a sales price of 25 cents or more are increased from $70 to $93 per year. (H.B. 1030, Laws 2003, effective as noted above; Legislative Impact Statement, Arkansas Department of Finance and Administration; E-mail, Arkansas Department of Finance and Administration, February 12, 2004.)

Arkansas--Franchise Tax: Annual Minimum Corporate Franchise Tax Increased

Applicable to calendar years beginning on and after January 1, 2004, the Arkansas annual minimum corporate franchise tax is increased. Life, fire, accident, surety, liability, steam boiler, tornado, health, or other kinds of insurance companies that have an outstanding capital stock of less than $500,000 are subject to an annual minimum corporate franchise tax of $300 (formerly, $100). Such companies that have an outstanding capital stock of $500,000 or more are subject to a franchise tax of $400 (formerly, $200).

Legal reserve mutual insurance corporations that have assets of less than $100 illion are subject to a franchise tax of $300 (formerly, $100). Such corporations that have assets of $100 million or more are subject to a franchise tax of $400 (formerly, $200). Mutual assessment insurance corporations are subject to a franchise tax of $300 (formerly, $100). Mortgage loan corporations and those corporations paying more than the minimum tax are subject to a franchise tax rate equivalent to 0.3% (formerly, 0.27%) of that proportion of the par value of their outstanding capital stock that their aggregate outstanding loans made in Arkansas bear to the total aggregate outstanding loans made in all states. Moreover, the $1,075,000 annual corporate franchise tax cap is eliminated.

Franchise taxes and reports for calendar year 2004 and subsequent years are due by May 1 of the reporting year. Franchise taxes and reports for calendar year 2003 and years prior to 2003 are due by June 1 of the reporting year. (Act 94 (S.B. 80), Laws 2003, effective March 1, 2004; Legislative Impact Statement, Arkansas Department of Finance and Administration; Telephone Conversation, Arkansas Secretary of State, February 12, 2004.)

Michigan--Sales and Use Tax: SST Conformity, "Equalization" Provisions Introduced

Legislation to conform Michigan law to the Streamlined Sales and Use Tax Agreement and impose taxes to equalize the impact of the conforming changes has been introduced in the legislature. The legislation has been introduced in four separate House bills that would take effect, on an as yet unspecified date, only if all four bills are enacted into law.

H.B. 5502 and H.B. 5503 would amend the use tax and general sales tax statutes to implement changes required to comply with the Agreement.

H.B. 5504 would enact several provisions, largely of an administrative nature. mong these provisions would be a re-enactment of authorization for the Treasurer to enter into the Agreement, and for a delegation to continue participating with other states in the Agreement's refinement. The previously enacted authorization for the state's participation expired at the end of 2002. Other provisions in H.B. 5504 would designate the membership of Michigan's delegation to the Agreement's Governing Board, enact an amnesty for sellers that volunteer to collect tax pursuant to the Agreement, enact seller registration provisions, and implement the various collection models authorized by the Agreement.

H.B. 5505, designated the "Streamlined Sales and Use Tax Revenue Equalization Act," would impose the following taxes.

A tax would be imposed on interstate motor carriers for the use of diesel fuel in commercial motor vehicles in Michigan. The tax would be imposed at a cents- per-gallon rate equal to 6% of the statewide average retail price of a gallon of self-serve diesel. A carrier would be entitled to a credit for 6% of the price of diesel fuel purchased in Michigan and used in a commercial motor vehicle.

A tax would be imposed on the privilege of storing, registering, or transferring ownership of a vehicle, off-road vehicle, manufactured housing, aircraft, or watercraft. The tax would be paid by the transferee at a rate of 6% of the retail value of the vehicle at the time of acquisition. The tax would not apply to (1) transactions by a licensed new or used vehicle dealer; (2) transfers for resale, that are otherwise exempt from use tax, or that are already subject to sales tax; or (3) aircraft subject to the provisions discussions below.

A tax would be imposed on the privilege of storing, registering, or transferring ownership in Michigan of an aircraft purchased outside the state and used solely for personal, nonbusiness purposes. The tax would be paid by the transferee at a rate of 6% of the retail value of the aircraft at the time it first enters the state. The tax would not apply to transfers for resale or those otherwise exempt from use tax. (H.B. 5502, H.B. 5503, H.B. 5504, and H.B. 5505, introduced February 10, 2004.)

West Virginia--Sales and Use Tax: SST Clean-Up Bill Passes House

The West Virginia House of Representatives has passed legislation that would make changes, principally of a technical nature, associated with the state's previously enacted conformity to the Streamlined Sales and Use Tax Agreement. The legislation now goes to the Senate. Among other changes, it would eliminate obsolete language, correct the unintended repeal of certain exemptions, enact sourcing rules for telecommunications services and florist sales, and clarify application of the hold harmless rule. (H.B. 4349, passed House February 11, 2004.)

Wisconsin--Corporate Income Tax: Proposal Would Accelerate Single Sales Factor for Job Creators

Legislation introduced in the Wisconsin Senate on February 10, 2004, would, if enacted, permit corporations creating a specified number of new jobs in the state to use a single sales factor to apportion their income for Wisconsin corporate franchise (income) tax purposes in tax years prior to the scheduled implementation of a single sales factor for all corporations. npar_ Under current law, income is apportioned using a three-factor formula incorporating property, payroll, and a double-weighted sales factor. Pursuant to Act 37 (S.B. 197), Laws 2003, the property and payroll factors are to be phased out beginning in 2006, with the sales factor becoming the only factor beginning in 2008.

The proposed bill provides that a corporation may use single sales factor apportionment in taxable years beginning before 2008 if the corporation as a net gain of 100 employees in the taxable year and retains the employees for three consecutive years. Act 37, Laws 2003, contained a similar provision when it was originally introduced, but the provision was removed prior to its enactment.

The bill has been referred to the Senate Economic Development, Job Creation, and Housing Committee. (S.B. 450, as introduced in the Wisconsin Senate, February 10, 2004.)

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